Pharmagen Pharmaceutical Development Funding
Overview of the case:
Pharmagen, a pharmaceutical company entered into a funding agreement with an unrelated third-party private equity investor (PEI). As part of the Agreement, the company will receive up to a total of $500 million from the PEI for R&D costs incurred by the development of a potential new drug X only. If at any time the project is scrapped the amount received by Pharmagen is non-refundable. Pharmagen retains all the intellectual property rights to X. The investor will receive royalty payments of new drug X and an existing commercialized drug.
How to account for the funding of the R&D and royalty payments
R&D cost – first way：
ASC 730-20 is applicable
Based on the fact given in the case, none of the four conditions under ASC 730-20-25-6 relate to the Pharmagen. Therefore, we cannot make a decision if it is liability. However, under ASC 730-20-25-8, the repayment of funds provided must depend only on the result of the R&D having future economic benefit. Since the PEI has a contingency relating to the sales of an existing commercial drug, the repayment is not solely reliant on the development of drug X. Therefore, Pharmagen is not transferring all financial risk to PEI As a result, the funding must be recorded as a liability.
Following the guidance provide by ASC 730-20 is the best option for the case because of the high risk of potential failure for the product.
R&D cost – second way:
ASC 470-10-25 is applicable
This standard applies to an entity which receives a specified percent of the revenue related to a particular product line. Based on the ASC 470-10-25-2, if one factor is met, the proceeds are considered debt. The first factor is whether or not the transaction takes the likeness of a sale. In the case, since PEI is receiving a percentage of an existing drug which indicates that it is a sale. As a result, the proceeds are considered debt. However, due to the large...
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